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The Impact of Corporate Governance on Firms’ Performance and Earnings Management: The Case of China’s Listed Firms

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  • Ismaila Sow
  • Kokou Wotodjo Tozo

Abstract

This paper examines the effect of corporate governance on firms’ performance and on earnings management in China. Previous works, including on India for example, showed that having board independence did not guarantee to improve firm performance due to poor monitoring roles of independent directors. Findings on the United States, the United Kingdom, New Zealand or Korea were not consensual. As China has become a realm for thriving businesses, one question is what are the core values that drive such successes if they are any different from other countries? To study this question, we use available updated data from 2008 to 2014, on 2,098 Chinese’s listed companies for empirical evidence. Firms’ performance was measured using the return on equity, the return on assets and Tobin’s Q ratios whilst “discretionary accruals” was used as a proxy for earnings management. Two different regression models including pooled OLS and fixed effects were used to test our hypotheses. Main findings indicate that CEO duality and larger boards are detrimental to the firm performance. By contrast, firms perform better when a board includes more independent directors. Furthermore, firms with smaller boards have better earnings quality. These results suggest that board size is a key factor for firms’ performance in China. In general, boards do not exceed 22 members in China and the highest share of independent directors is nearly 37% of boards’ seats. These findings may be an important hint for new local ventures as well as for foreign partners willing to cooperate with Chinese firms.

Suggested Citation

  • Ismaila Sow & Kokou Wotodjo Tozo, 2019. "The Impact of Corporate Governance on Firms’ Performance and Earnings Management: The Case of China’s Listed Firms," International Journal of Science and Business, IJSAB International, vol. 3(1), pages 84-96.
    • Handle: RePEc:aif:journl:v:3:y:2019:i:1:p:84-96
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    References listed on IDEAS

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    1. Yermack, David, 1996. "Higher market valuation of companies with a small board of directors," Journal of Financial Economics, Elsevier, vol. 40(2), pages 185-211, February.
    2. Pi, Lynn & Timme, Stephen G., 1993. "Corporate control and bank efficiency," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 515-530, April.
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    Cited by:

    1. Emmanuel Mensah & Joseph Kwadwo Tuffour & Mamdouh Abdulaziz Saleh Al-Faryan, 2023. "Does macroeconomic misery index matter in the micro firm-level earnings Management – performance nexus? Evidence from dynamic Panel threshold regression," Cogent Economics & Finance, Taylor & Francis Journals, vol. 11(2), pages 2289321-228, October.

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